The social housing crisis
We know that Britain is suffering from a housing crisis. While it is a crisis of many parts, the collapse of construction of social housing is widely noted as a key component of the problem. As a result, there is a widespread belief that a renewed programme of building social housing would help alleviate this situation. Unfortunately, the new Labour government has been keen to point out that it has inherited such an extensive fiscal problem from the previous government, that an immediate and widespread expansion of the publicly funded social housing sector is unlikely in the short, or even medium-term.
Separately, as a recent editorial in the Financial Times (FT) pointed out, while the UK’s savers continue to put money aside, many do not use their savings to invest, rather preferring to leave them in cash/savings accounts. The FT editorial assigns this reticence to a lack of education about financial services and a lack of appreciation of how risk works out for investments. Others might suggest that this unwillingness to invest in financial instruments is rather more about a mistrust of the financial services sector than an ignorance about investing.
While these issues may appear to be separate, it is worth exploring how they might be fruitfully bought together. Below I explore the idea of national social housing bonds as a response to both the above problems. I would like to acknowledge that this idea arose in a recent discussion between myself & Don Thompson on Mastodon.
Current methods for funding social housing
Since the end of the nineteenth century council houses (now referred to more often as social housing) were built by local councils, partly from money taken for the general council budget (raised by local taxation, the ‘rates’), partly from central government grants, and partly by recycling rents into further construction and maintenance. It’s a long and complicated history, but the key issue is that the ultimate root of all funds lay either in the tax system or was from the social housing sector itself. At present, the two most obvious models for social housing are the traditional council funded approach, and the requirement on the private sector to provide ‘affordable’ housing, which seems to be the current Labour government’s preferred method.
Although funding models changed over most of the twentieth century, the introduction of the ‘right to buy’ and shifts in policy driven by the Conservative government led by Margaret Thatcher, rendered this model unsustainable. Not only were houses sold to occupants at well below their real value, representing a capital loss to the councils involved, the restrictions on recycling the purchase price paid meant that the money paid for the houses could not be used to invest in the construction of replacement social housing. This contributed to the collapse of construction of social housing.
The main issue is how to radically increase the social housing stock
Housing associations are already using private finance to underpin the construction of social housing, in the form of interest bearing bonds. These bonds allow private investors looking for low risk property backed assets to invest in the provision of social housing with the interest covered by rental income (new link A). These assets are particularly popular with pension funds seeking long-term stable assets to underpin pension provision.
So, although some social housing is still built, the new Labour government aims to kick start a major expansion in construction. To this end Angela Rayner, secretary of state for housing, communities and local government, has proposed a major review and reform of planning regulations, to allow the building of more ‘affordable’ homes. Given the manner in which Chancellor Rachel Reeves has presented the fiscal environment, Rayner cannot at this stage pledge a massive uplift in council funding for social housing. She seems to be intended on relaxing some planning restrictions, as an effective exchange for private developers building more affordable houses.
Although the details have yet to be revealed, Rayner’s pronouncements have emphasised the private financing of expanded social provision of homes. However, there may be another way of expanding social housing, given the budgetary problems currently affecting most local councils, and the question of the legitimacy or morality of profiting from building social housing.
While housing associations have utilised bond financing, this has been via bond markets and mainly targeted at institutional investors. Bonds are a form of debt, where the loan is repaid at a certain date and in the interim interest payments are paid to the holder of the bond. Bonds can be bought and sold with their value reflecting the likelihood of them being repaid at full value when they mature (the loan period ends).
Social housing bonds hold their value as they are secured on a safe asset, housing. As such many institutions utilise them to store value while earning income to pay out either to pensioners or others. However, these bonds are not available to many individual savers, not least due to their high unit value.
Could national social housing Bbonds provide a massive uplift in financing social housing?
Might a new type of social housing bond be the answer to how to fund a massive and accelerated expansion of social housing? A new national social housing bond (NSHB) marketed and available to individual savers, rather than institutional investors could be the answer.
There are many ways that a national social housing bond could be organised, from a fixed interest product offered for a fixed time, to a perpetual bond paying an interest rate for a much longer period (until a future government chose to settle the debt). Like gilts (public debt) there would be the possibility of allowing a secondary market to provide liquidity options for investors (where investors buy and sell as they need to raise money or invest funds),with yields varying by purchasers’ assessment of the success of the social housing programme. To pay interest and so for the investor to earn an income, NSHB’s would be tied to rental income from the housing developments they financed. As such, social housing bonds could also be used as a part of a privately invested pension portfolio to generate a return to help fund an individual’s retirement.
One model would be similar to the current green bond, which pays a fixed interest rate for three years. While three years would be too short for the construction of social housing and repayment (via rental income) of its costs, the hypothecated (the tax dedicated to a green purpose) character of the green bond may be a useful model. Where individuals were looking to safely invest savings, but were also interested in ameliorating the housing crisis, social housing bonds might become popular.
Individual investors can feel safe with NS&I national social housing bonds
Assuming that many savers do not invest due to mistrust of financial services, it is also the case that National Savings & Investments (NS&I), a public body that issues debt (sells bonds) on behalf of the state, remains popular, despite some qualms about its service and the risks of low winning rates from its most high-profile product; premium bonds. With over £230bn invested, NS&I already handles a range of public saving products, all of which guarantee funds beyond the £85,000 limit mandated in the private sector, so running a new investment product would require little additional organisational development.
While there would be details to iron out, and mechanisms set in place to manage risk, needed around any form of investment, given the NS&I’s already extensive experience in handling public investment in state activity, what seems to be the key to developing this model would be the political will to bypass the financial services sector for this investment activity.
Real Estate Investment Trusts
Another way for NS&I to offer investment opportunities to individual savers would be via a Real Estate Investment Trust (REIT). These were established in the UK by the 2006 Finance Act, reflecting practice across many other countries. They are corporations set up to allow collective investment property portfolios, and have already been demonstrated as a useful investment strategy. Here the only differences would be that the REIT would be run by the state and focussed on social housing (rather than commercial real estate, for instance).
Given the utilisation of REITs by some investors, the model of investing in the construction and management of property (real estate) has already been demonstrated as a useful investment strategy. The only significant difference would be the social housing bonds, if a REIT model was preferred, would be an investment trust owned (and run) by NS&I.
There could be a push back from the private financial sector
Undoubtedly, there would be suggestions that these government arranged savings and investment instruments would represent unfair competition for private investments, not least as the new national social housing bonds or social housing REITs would be underpinned by a state guarantee. However, as the social housing crisis has not been solved by commercial development of ‘affordable’ homes, and savers are already holding back on investments, NSHBs or NS&I hosted REITs would be a way of tackling two specific market failures through a single measure.
If we recognise the housing crisis is a social crisis, then the move to government-backed NSHBs or social REITs could be justified, as a response to a crisis that has few recent historical precedents. Given the experience of NS&I and of REITs as well as bond financing for social housing, the bringing together of savers and investment in social housing is a solution that, if successful, might relatively quickly provide the funds to kick-start the revival in social housing, which Rayner argues is required in this country.
